Over the last decade, real estate developers have begun to use private transfer fees to generate long-term income. The fees, typically 1% to 1.75% of the sale price of a property, have to be paid to the developer each time the title to the property changes hands, as it does during a home sale.
In some cases, a portion of the fee goes to the private company that structures the agreement, with a fraction of the fee sometimes going to open space preservation.
A private transfer fee, also known as a reconveyance fee, is added as a covenant to the deed on each new home a developer sells. So every time the property is sold, often over as long a period as 99 years, the new buyers have to pay the developer a fee equal to a set percentage of the sales price until the covenant runs out.
Private transfer fees have been used in the past on properties in 43 states. The American Land Title Association says 41 states ban or restrict private transfer fees.
Who supports private transfer fees and why?
Developers sometimes use private transfer fees to spread development costs over future sales. They charge the first buyer less for the home than it would normally cost, but expect to make up that discount by collecting a private transfer fee from future buyers.
Environmental groups, like the Sierra Club and Audubon Society, see the fees as a source of long-term funding, even though they generally receive a very small portion of a fee—typically around 5%—and there’s no required oversight of fund distribution. Ironically, the fees can also push projects forward in areas where strong environmental groups have opposed or blocked developments.
Some communities use private transfer fees to fund charitable giving. The St. Joe (Florida) Community Foundation annually collects about $1 million in private transfer fees and contributes about $800,000 to local hospitals, museums, colleges, and recreational facilities.
What opponents say
“The argument for these fees has been that if it’s a good property in a desirable neighborhood, a seller will be willing to shell out the extra fee,” says NATIONAL ASSOCIATION OF REALTORS® Economist Paul Bishop. “That may not be the case in markets across the country, where pricing is already depressed and a seller needs every advantage to maintain marketability.”
Among the arguments against private transfer fees:
- Too-expensive homes. A home with private transfer fees may be harder to sell. Or the owners may have to lower the sale price since their house will be more expensive than a comparable home when you factor in the price of the private transfer fee.
- Buyer confusion about value. “Private transfer fees place a long-term encumbrance on land,” says R. Wilson Freyermuth, who teaches real estate law at the University of Missouri. “Given market fluctuations, it’s hard for consumers to determine exactly how private transfer fees will impact the value of land.”
- Unpleasant closing surprise. Buyers may not discover until closing that they owe an additional 1% of the sale price because disclosure of the fees isn’t often required.
- Title issues. Private transfer fees can cause title issues in jurisdictions where purchase agreements say the buyer will get fee simple title to the property (that’s a title with no restrictions), according to research by Frank C. Aiello, an assistant professor at Thomas M. Cooley Law School in Lansing, Mich.
- Reduced pool of potential buyers, because some of the largest players in the mortgage market, including Fannie Mae, Freddie Mac, and the U.S. Department of Housing and Urban Development, won’t guarantee loans for homes carrying private transfer fees. The Federal Housing Finance Agency is also considering a similar ban.
- Developers benefit, buyers may not. Buyers may be turned off by a fee that benefits the developer versus a fee attached to a benefit, such as community open space improvements, which they can enjoy.
- Forced charitable funding. Some opponents of private transfer fees used to fund charities argue that individuals should be able to make their own decisions about which non-profits to support rather than being forced to contribute to a community foundation that in turn decides what causes to fund.
Buying or selling with private transfer fees
If you own a home that carries a private transfer fee, educate yourself about the terms of that covenant, make sure that the fees are being properly applied, and disclose its existence when you sell your home.
If you’re buying a home, ask if it has a private transfer fee. If it does, carefully weigh how that might influence your home’s future value and whether you’ll receive any benefit from that future payment.